Special discretionary payments were taxable as employment-related benefits.
On the profitable sale of a private business (especially where the price achieved is a particularly good one), principled vendors will often feel it is only right to share their good fortune with some of the key players who have contributed to their success over the years. What’s the tax treatment of payments made in those circumstances? The First-tier Tribunal (FTT) decision in Orient Overseas Container Line Ltd (UK Branch) v HMRC [2023] UKFTT 996 (TC) sets an unwelcome tone.
Shares in a family-owned private company were sold. The family made a ‘special discretionary payment’ to each of the company’s 10,300 employees worldwide in order to ‘express its appreciation for the long corporate journey we have had together’.
HMRC contended that the payments were taxable as earnings ‘from’ the recipient’s employment.
The FTT held that they were not. Rather, the chairman (on behalf of the family) ‘made the payments as a mark of appreciation to the UK workforce (as part of a gesture to of similar appreciation [sic] to the global workforce) following the successful sale of the business and in consequence of his long tenure as both chairman and majority shareholder of OOCL. He did so as a personal gesture of thanks from the proceeds of sale.’
The FTT considered five factors to be particularly relevant, namely:
the payments were non-contractual, voluntary and were not expected by the recipients;
at 50% on average of annual salary and exceeding five times the usual maximum performance-related bonus, the payments were disproportionate though not significantly so;
the payments were not part of a regular pattern of payment and would not be repeated;
each employee was paid a market rate salary and performance-related bonus without reference to the payments; the payments were not ‘gratuities’ in the sense of tips paid in the retail service industry; and
the full cost of the payments was borne by the family and were stated to have been funded from the sums received from the share sale. As such they could not have been made on that same basis by the company itself.
These factors outweighed the fact that the payments were made through the company’s payroll (and thereby to an employee by the employer, albeit as an administrative convenience to the family).
You may or may not agree that the FTT was right to hold that the payments weren’t earnings ‘from’ the employment. But it’s the rest of the case that is disquieting.
HMRC argued that if the payments weren’t earnings from the employment, they were taxable as employment-related benefits. This requires only that a benefit be provided ‘by reason of employment’ which the courts have held to be of ‘far wider’ scope than ‘from the employment’, explaining that:
‘The words cover cases where the fact of employment is the causa sine qua non of the fringe benefits, that is, where the employee would not have received the fringe benefits unless he had been an employee. The fact of employment must be one of the causes of the benefit being provided, but it need not be the sole cause, or even the dominant cause. It is sufficient if the employment was an operative cause – in the sense that it was a condition of the benefit being granted...’
Accordingly, the FTT held that the payments, although not ‘earnings’ under the basic rule, nonetheless fell to be taxed as employment-related benefits, with the same practical effect that tax and NIC were due.
This decision doesn’t feel right and is surely not what the legislation on ‘employment-related benefits’ was ever intended to catch. It means that tax will always be chargeable on personal ‘thank-you’ gifts made in the circumstances described at the start of this note to recognise the exceptional personal qualities and achievements of one or two selected employees who have gone above and beyond over the years. Nor does it sit at all well either with the legislation taxing employed sportsmen and sportswomen on testimonials (legislation which on the basis of this case is otiose) or with the statutory exemption (subject to conditions) for the first £100,000 of such income.
Hopefully the Upper Tribunal will have its chance to opine.
Home >Articles > Orient Overseas Container Line: a tax charge by the back door?
Orient Overseas Container Line: a tax charge by the back door?
Special discretionary payments were taxable as employment-related benefits.
On the profitable sale of a private business (especially where the price achieved is a particularly good one), principled vendors will often feel it is only right to share their good fortune with some of the key players who have contributed to their success over the years. What’s the tax treatment of payments made in those circumstances? The First-tier Tribunal (FTT) decision in Orient Overseas Container Line Ltd (UK Branch) v HMRC [2023] UKFTT 996 (TC) sets an unwelcome tone.
Shares in a family-owned private company were sold. The family made a ‘special discretionary payment’ to each of the company’s 10,300 employees worldwide in order to ‘express its appreciation for the long corporate journey we have had together’.
HMRC contended that the payments were taxable as earnings ‘from’ the recipient’s employment.
The FTT held that they were not. Rather, the chairman (on behalf of the family) ‘made the payments as a mark of appreciation to the UK workforce (as part of a gesture to of similar appreciation [sic] to the global workforce) following the successful sale of the business and in consequence of his long tenure as both chairman and majority shareholder of OOCL. He did so as a personal gesture of thanks from the proceeds of sale.’
The FTT considered five factors to be particularly relevant, namely:
the payments were non-contractual, voluntary and were not expected by the recipients;
at 50% on average of annual salary and exceeding five times the usual maximum performance-related bonus, the payments were disproportionate though not significantly so;
the payments were not part of a regular pattern of payment and would not be repeated;
each employee was paid a market rate salary and performance-related bonus without reference to the payments; the payments were not ‘gratuities’ in the sense of tips paid in the retail service industry; and
the full cost of the payments was borne by the family and were stated to have been funded from the sums received from the share sale. As such they could not have been made on that same basis by the company itself.
These factors outweighed the fact that the payments were made through the company’s payroll (and thereby to an employee by the employer, albeit as an administrative convenience to the family).
You may or may not agree that the FTT was right to hold that the payments weren’t earnings ‘from’ the employment. But it’s the rest of the case that is disquieting.
HMRC argued that if the payments weren’t earnings from the employment, they were taxable as employment-related benefits. This requires only that a benefit be provided ‘by reason of employment’ which the courts have held to be of ‘far wider’ scope than ‘from the employment’, explaining that:
‘The words cover cases where the fact of employment is the causa sine qua non of the fringe benefits, that is, where the employee would not have received the fringe benefits unless he had been an employee. The fact of employment must be one of the causes of the benefit being provided, but it need not be the sole cause, or even the dominant cause. It is sufficient if the employment was an operative cause – in the sense that it was a condition of the benefit being granted...’
Accordingly, the FTT held that the payments, although not ‘earnings’ under the basic rule, nonetheless fell to be taxed as employment-related benefits, with the same practical effect that tax and NIC were due.
This decision doesn’t feel right and is surely not what the legislation on ‘employment-related benefits’ was ever intended to catch. It means that tax will always be chargeable on personal ‘thank-you’ gifts made in the circumstances described at the start of this note to recognise the exceptional personal qualities and achievements of one or two selected employees who have gone above and beyond over the years. Nor does it sit at all well either with the legislation taxing employed sportsmen and sportswomen on testimonials (legislation which on the basis of this case is otiose) or with the statutory exemption (subject to conditions) for the first £100,000 of such income.
Hopefully the Upper Tribunal will have its chance to opine.
